China’s efficient response to COVID-19 transformed the disadvantage into an advantage, the pandemic will definitely distort global supply chain but will end up intensifying Chinese rise as well, globalization will be back but this time led by the Chinese market socialist system.
Globalization between 2008 and 2020
Since 2008, globalization is losing momentum. Global trade between 2009 and 2019 grew 22% while between 1998 and 2008 grew 225%. Global capital flows are almost stagnant at the level of 2008 in the year 2019 while it grew manifold between 1997 and 2008. There are three reasons for this loss of momentum of globalization:
The US economy has become too small to absorb global production and asset while Chinese production has become too big to depend on global demand. But US Dollar global usage has not given in that much to Chinese Yuan. So the global market is distorted where China is failing to absorb as much production and asset it could have if Yuan global usage rise. For this to occur, the global market has to wait until the Chinese navy starts dominating seas.
Chinese growth, the main driver of globalization finally normalizing to 5-7% growth rate during the last decade, so global growth rate and hence trade and capital flows falling as well.
The tension between rising China and falling USA leading to trade war and technology war, causing fall in global trade and capital flows.
First World is almost stagnant, Chinese growth is normalizing and no other developing country has as much growth potential as China. That is because 1950-80 China with huge population saw an end of feudalism, huge investment in education, health, infrastructures. Africa or South Asia does not have that disciplined productive the workforce. Vietnam and Laos may have but they are too small compared to China. Bangladesh and Ethiopia to do not match the Chinese potential. Even joined together they do not come close.
By 2035, Chinese victory over the US will be vivid more than expected, the US will agree to accept a Chinese dominated zone. But between 2020 and 2035 we will see one of the worst phases of geopolitical clash between rising China and falling USA. If geopolitical clash is associated with new national liberation or socialist revolutions or adaptation in Africa, South Asia, Latin America or parts of them, globalization will gain momentum again from 2035-40. It will continue up to 2060-70 until productive forces gap and wage gap between First World and Third World falls considerably.
Rise of China between 2008 and 2020
Rise of China must not be taken for granted in the post-2008 crisis world. China had to face many obstacles in the last twelve years. China overcame them successfully.
After 2008-crisis, immediate problem was its too much export dependence. In 2007, export was 37% of Chinese GDP. Crisis convinced Chinese communist leadership that they can no longer depend on global market for growth. They started spending in infrastructures inside China like highspeed railways, bridges, cities in poorer Western China, etc. This resulted in a massive internal corporate debt of Sate Owned Enterprises but it also helped to generate domestic demand which helped China. By 2019 export share of GDP fell as low as 18%. Most developed countries like South Korea, Germany; Japan failed to reduce their export dependence. This is because of a unique market socialist economy of China which allows it to invest none profitably through state-owned enterprises. After smelling success, Chinese epitomized this infrastructure building program abroad as Belt Road Initiative. In this way, China turned an obstacle into opportunity for itself.
China began to take advantage of the global market, global technology and global liquidity by specializing in lower-value goods of the global value chain in 1980s. But in 2010s, domestic wage rate was rising and Chinese leaders understood that China will loss competitive advantage to Indo-China, Bangladesh, etc. in lower-value goods. So Chinese leaders began to think about creating innovative companies to move to higher-value chain. China spent a huge amount in Research & Development and allowed innumerable innovative private start-ups to grow. After almost 10 years, China is home to largest number of unicorns and promising start-ups. In fact, it is Chinese success in moving the higher supply chain that forced the US to go to trade war and technology war against China. Alarm bells are ringing in the West that China may catch up US in the field of Artificial Intelligence, Robotics, Quantum Technology, Bio-Technology, Aviation, Internet of Things, etc. in the2020s. Today China has not only its own domestic parallel of Facebook, Whatsapp, Amazon like Wechat, QQ, Alibaba, Taobao but Chinese app TikTok is now world’s most used app which Facebook was trying to copy. US sanctions against Huawei resulted in very few successes. The successful movement towards higher value chain definitely shows Chinese leadership quality and dedication.
Arab Spring began to unravel throughout the Arab World in 2011 and Western media began to talk about a new wave of democratization in remaining autocratic countries of the world. Many in West hoped that Chinese Westernized middles class will bring an end to communist party rule in China. But Spring failed to move beyond Arab lands and proved itself to be ineffective in doing good for common people. Spring destroyed all success of Khadafi led Libya and encouraged religious fanatics to come to power. The tacit approval to Spring by West made Israel and Saudi rulers suspicious about Western motives. This proved a costly geopolitical loss for the US and West. Chaos after Spring also helped China to display democratic movements as a source of destabilization and social disaster. In fact, Arab Spring ended up as a proof of the weakness of liberal revolutions.
Immediate Impact of COVID-19
Western Democracy Fails
China began to struggle with COVID-19 outbreak by January 2020 and West seems to enjoy the scene. But as discussed previously China can overcome obstacles because of its superior market socialist system. Chinese system allows its leaders to put people above profit. Thus China locked down the source of outbreak completely and used all resources to ensure its success. West was busy examining how undemocratic lockdown is all about and if Corona to become Chernobyl of China from January up to mid-February. Next their concentration went to Iran which was then losing leaders to coronavirus.
West was then arguing if outbreak will end their adversary. Finally when the outbreak struck Italy really hard by late February, West began to feel the heat. Then gradually Spain, U.S., France, UK, Belgium, Germany, Netherlands all became the centre of pandemic. It was clear that West has lost the time China bought for it by locking down itself. West ended up taking same undemocratic measures for which they were criticizing China. In democratic systems, people are habituated in blaming others for their own faults. People blame politicians, politicians blame the opposition and so Trump ended up blaming China, World Health Organization, state governors and previous administration. He is still worrying about profit and many of his party leaders say that elders can be sacrificed for profit.
Innovative Stimulus Package of China
Regarding stimulus package, difference between Chinese socialist system and US capitalist system is quite enlightening. China is giving money to those who need it i.e. owners and workers of restaurants and small shops. Also timebound vouchers is distributed to force consumers to spend all money on restaurants and shops and movies. This is causing multiplier effect in creating demand. The US capitalist leadership is giving all money to big capitalist class who already has accumulated money and investing only where they can find profits. Consumers were given money too, part of which they are hoarding. Hence net demand and loan creation is much lower. In fact, Chinese money stimulus creating 10 times more demand compared to US money stimulus.
China got the Upper Hand
When China was locked down in January world was arguing if China will fall behind in competition. After March, China was only working while rest of the world is under lockdown. So it is in advantageous position. People’s Bank of China bought out shares of many Western, Indian and Brazilian companies. USA on the other hand has lost all gains of stock market since Trump came. US employment rate also rose from record low to record high.
Apart from increasing production at state-run oil companies, China had already been working for years to increase its oil reserves. It produced 191 million tonnes of crude oil last year, which was 30% of its annual consumption. This year is also going to be very important for the Chinese oil reserve. By the end of 2020, China wants 85 million tonnes of oil in its emergency reserves, which will be equivalent to the oil the US holds as its strategic petroleum reserve. America’s is the world’s largest oil backup. But with low oil price, US shale oil companies are in grave crisis.
Beijing has sent medical teams to Serbia, Cambodia, Iran, Iraq, Laos, Pakistan, Venezuela, Italy and the Philippines to aid in the fight against the virus. Most of the world is now dependent on China for medical kits, testing kits, ventilator, mask, etc. The US on the other hand criticized WHO and suspended its payment, stopped flight from Europe without giving any notice to the later, stopped exporting medicine while forced India to export the same, kept sanctioning Iran, Venezuela, Cuba to prevent them from countering pandemic and even hijacked masks and kits destined for Europe and Brazil.
Under Xi Jinping, China has solidified its claims in the South China Sea due to the ‘nine dash-line’ policy which lays claim to several island chains in the region. The policy has caused clashes with several countries under threat from China but it now appears Xi is expanding into the Indian Ocean too. Chinese navy even sunk a Vietnamese fishing boat without causing much hue and cry in Western media. Chinese naval assets have been found to dock in Gawadar and Colombo as well from satellite images.
Long Term Impact of COVID-19
The COVID-19 will add fuel to US demand of reshaping global supply chain such that China cannot gain as much from such chain as it is gaining now. Japan has declared subsidies for those who will shift production from China to the South East Asian countries. Though Japan said it is only to distribute assets to avoid risk arising out from any particular country in future. China, on the other hand, reformed its factor market to make it more attractive to foreign investors and also allowed foreign investors to have 100% stake in its financial market. Intellectual Property was strengthened as well to attract foreign investors.
Undoubtedly, the US-China cold war will distort global market and will make global village loser as a whole since most efficient supply chain will be under attack of sanctions, tariffs, subsidies. But who will gain from such war, commoners with few understanding, of economics will feel that China will loss at least some of its production while others will gain. But economics is not that simple, loss of export can be compensated by state-led infrastructure, raising military spending and adding investment in high-tech. Chinese market socialist system is more efficient than others in replacing exports by non-profit investments compared to any other Western countries. Distorting supply chain, on the other hand, will raise import costs for the US and its allies which will make its economy inefficient. This will further weaken US capability to maintain its global order. Inefficiency inside the US economy will attract more investors towards China and part of US business will end up allying with China.
China moved away from export centric growth, propelled domestic invention and innovation and transformed pandemic outbreak from disadvantage to advantage. China succeeded in these three cases because of its market socialist system which allows resources to be invested both profitably as well as non-profitably in a planned way according to the demand of the situation. West, on the other hand, is handicapped by profit-centric resource allocation just like USSR was handicapped by planned resource allocation only. The COVID-19 will definitely distort global supply chain but will end up intensifying Chinese rise as well, globalization will be back but this time led by the Chinese market socialist system.
DISCLAIMER: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy and position of Regional Rapport.